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JOHANNESBURG, July 4 (Reuters) - South Africa is preparing
to launch sub-Saharan Africa's first Islamic bond, paving the
way for issues by other countries in the region, officials said
on Wednesday.

Thuto Shomang and Monale Ratsoma of the South African
Treasury's government borrowing department told Reuters that
South Africa was leaning towards a dollar-denominated, five-year
sukuk, using an ijara structure.

"It's the one that seems to attract investors' interest.
That's the one that the recommendations have been on so far,"
said Ratsoma, adding that first-time issuers usually chose
five-year tenors so that was what South Africa was considering.

The bond would be marketed to Middle Eastern countries.
There are large pools of Islamic investment money in the Gulf,
which have been buying sukuk eagerly this year as the global
financial crisis hurts many other investments.

"On this deal we really have to go out and talk to them
because we don't know what their response will be and we don't
want to have a failed transaction the first time around," said
Shomang.

The Treasury put out a request for proposals in December
and has appointed two consortiums led by Standard Bank
and BNP Paribas to make the issue.
Bahrain's Al Baraka Banking Group, Kuwait's Liquidity
Management House, Nova Capital Partners and Regiments Capital
are also involved, banking sources said.

Islamic finance prohibits interest payments so sukuk are
structured to provide returns to investors in other ways. In a
common form of ijara deal, the originator sells assets to a
special-purpose vehicle and then rents them back at a price
which gives investors in the sukuk a profit.

OTHER COUNTRIES

The South African Treasury is still deciding the precise
timing of the issue, and is also considering a sukuk sale to
domestic investors.

Kenya, Nigeria and Tanzania have also been planning sukuk
issues, and a successful sale by South Africa could encourage
them to put those plans into operation.

Muslims make up only 2 percent of the population of South
Africa, which has a BBB+ foreign currency credit rating from
Standard & Poor's, so the country seemed an outside contender to
be the region's leader in Islamic finance. But it has been
seeking to diversify its investor base, and its Treasury has the
financial sophistication to explore new funding methods.

"I know there's jostling between Kenya, Nigeria and South
Africa on who wants to take the lead, but I think the country
that actually issues sukuk and attracts investment into the
sukuk market is going to determine the key infrastructure for
the development of Islamic finance," said Amman Muhammad, an
Islamic banker in South Africa.

In its 2012/2013 budget, announced in February, South
Africa's Treasury said it intended to borrow $3 billion in
global markets over the medium term to maintain benchmarks in
major currencies and meet part of its foreign currency
commitments.

Finance Minister Pravin Gordhan has said developing Islamic
finance and issuing sukuk would encourage new forms of foreign
investment beyond traditional Western funding.

"The dollar sukuk is directly linked to and intended to
attract FDI (foreign direct investment) into South Africa. When
you create a sukuk you promise a sharia-compliant return, and
immediately the Muslim countries sit up and notice - the
petrodollar countries," Muhammad added.

"When you marry the sharia-compliant return with an emerging
market economy like South Africa...it actually becomes quite an
attractive proposition in your investment portfolio, to be able
to invest in a country like this."

Meanwhile, issuing a domestic sukuk could help to develop a
local sukuk market and resolve a problem faced by South Africa's
Islamic financial institutions.

They have to hold certain amounts of government securities
to satisfy central bank reserve rules; since they have been
restricted to buying conventional securities, they have obtained
interest which they have then had to give away to charity,
bankers and Treasury officials said.

If they were able to satisfy reserve requirements by holding
sukuk, they could avoid the financial loss.
(Reporting by Xola Potelwa; Editing by Pascal Fletcher and
Andrew Torchia)